If you work in banking and are trying to navigate the post-Brexit landscape, J.P. Morgan’s European banking analysts are here to help. In a note out yesterday, they look at the implications of the UK’s vote for banking revenues in the short and medium term, sector by sector and bank by bank. This is what you need to know.
1. Investment banking divisions (IBD) are going to be hit hardest
As we reported earlier, J.P. Morgan thinks it’s the investment banking divisions that will be hit hardest by Brexit – areas like M&A and equity capital markets in particular.
“The underwriting and advisory areas could see material slowdown,” in the second half of this year, say J.P. Morgan’s analysts. Reduced CEO and board confidence are to blame.
The bank is predicting a 31% decline in IBD revenues in 2016 compared to last year.
2. Macro traders might be ok to begin with
With huge volumes being traded on FX markets and central banks rushing to regain control, you might think that FX and rates traders will do ok in a post-Brexit world.
J.P. Morgan’s analysts predict that macro traders will experience “some short-term positive impact due to elevated volatility driving higher volumes”.
However, they offer three good reasons why this won’t last. 1) Gapping volatility could lead to mark-to-market loses on inventory. 2) This immediate period of higher activity could be followed by a quiet second half, as is the case after previous sell-offs. 3) Secondary trading volumes are ultimately likely to dwindle as primary issuance slows.
3. Things look bad for credit traders
Widening credit spreads are not good for credit traders. Widening spreads mean falling bond prices, which complicate trading and can lead to mark-to-market losses on existing inventory. Spreads have widened already and in a “risk-off” environment, J.P. Morgan predicts that they will widen further still. While credit traders had a brief respite from falling revenues in the second quarter, J.P. Morgan therefore thinks that revenues will slide further in the second half of the year.
4. Equities traders will be busy but won’t make much money
In theory, equities traders should do ok from the Brexit. In reality, they may not. “Although volumes would be higher in a volatile environment, we do not see this necessarily translating into higher revenues for investment banks,” say J.P. Morgan’s analysts.
Why not? They say that volumes will go through “lower margin low-touch platforms,” that “a downward trending market generally results in lower margins,” that volumes will almost certainly drop-off after the chaos, and that “gapping volatility is not good for revenues” in equity derivatives.
5. Things will be worst at Deutsche Bank (and Credit Suisse)
J.P. Morgan’s analysts aren’t exactly positive about the revenue potential for any investment bank after last Friday. However, their most doomy prognosis is reserved for Deutsche Bank, whose 2016 earnings per share they’ve cut by 26% in the wake of the vote. Credit Suisse isn’t expected to fare well either in the wake of the referendum either, although the analysts don’t offer a firm prediction for the drop in earnings per share (EPS) there, observing simply that Credit Suisse generates a significant proportion of its fixed income revenues in credit and securitised products, both of which will suffer disproportionately in current markets.
Falling earnings per share usually translate into cost-cutting, If J.P. Morgan is right, it will be an interesting year for Tidjane Thiam and John Cryan and a challenging six months for employees at Credit Suisse and Deutsche.